How to Save a Million Dollars Like the Person Next Door
If you want to save a million dollars then the earlier you start, the easier it will be. While it may seem impossible to save a million dollars, it is possible.
Once you uncover the magic monthly number that you need then you can set up a recurring, monthly savings plan and you can be on your way to building your nest egg.
How Long Will It Take to Save a Million Dollars?
It can be hard to determine exactly how long it is going to take you to save a million dollars. It will depend on how much you are saving, how much your investment grows, and how much money you are making.
Investing is going to be an important part of saving a million dollars. If you want to learn how to save money fast, you will need to get an education in investing. Your compounding interest rate will also have an impact on how fast your money will grow.
If you want to save a million dollars, follow these steps and see how possible it can be.
Decide When You Want to Reach $1 Million
Whether you want to save $1 million by the typical retirement age of 65 or as soon as possible, the number of years you have left will determine who much you will need to save each month in order to do so. It’s just simple math and will only take a minute to figure out. Take your desired age when you want to save the million by and then subtract your current age. For example, if you are currently 30 and want to save a million dollars before you turn 65 then you have 35 years to save.
Decide How Much Your Investments Will Earn
This is not as simple as the step above. You need to think about how risk-averse you want to be and how much it scares you if you lose a little bit of your investment portfolio. Consider the types of investments that will give you a return you are comfortable with. How an investment has performed in the past is not necessarily how it’s going to perform in the future. The longer your investment time, the greater your chances are of getting an overall return that is close to the long-term average historically.
Stocks: The average return for the stock market is about 10%. It’s important to note that there were years when the market was way down and years when it was way up.
Share of adults investing money in the stock market in the United States from 1999 to 2018
Bonds: Bonds are usually considered a safer investment since the returns don’t change as much. However, the fluctuations with bonds aren't as high but on the flip side, the lows aren’t as low. The average return over the past 20 years was 5.31%.
Cash: Money in your wallet qualifies as cash but that’s not what is being discussed here. This is referring to investments, such as a money market account. These are the safest investments with the lowest volatility. Since there isn’t a high risk, these also have the lowest return. It’s not likely you will lose money but there is a likelihood that the investment doesn’t outpace inflation and then your money is slowly losing value.
Most investment portfolios include a combination of the three. Those who want more risk with a hopefully bigger return will have a portfolio with more stocks. Those who are more risk-averse should be investing in cash investments and bonds.
Find the Magic Monthly Saving Number
Now it’s time to figure out how much you need to save in order to get to $1 million, depending on how many years you have in your plan. You will see that it may be helpful to take on some investment risk in order to increase the chance of earning a bigger return over time.
If You Have 40 Years to Save
Those with the longest horizon are in the best shape thanks to some compound interest. If you start early and retire later, you could retire as a millionaire by saving about $179 a month if you assume a 10% rate of return. If you use a more conservative 6% return then the savings jump to $522 a month.
If You Have 30 Years to Save
Waiting just 10 years to start saving can have a big impact on how much you will need to save in order to reach the goal. With a 10% return, you need to save $481 each month and with a 6% return, you need to save $1,021.
If You Have 20 Years to Save
Even if your goal is still 20 years away, you still need to save $1,382 with a 10% return and $2,195 a month with a 6% return.
If You Only Have 10 Years to Save
Saving a million dollars in 10 years can be pretty tricky since you will have to save $4,964 a month. This can be hard to do, especially if you haven’t been saving consistently over your lifetime. If your returns are lower, you will need to save even more.
If you are somewhere in the middle of these benchmarks then you can use a calculator to play around with your own numbers. The longer you have left and the higher the average annual return then the greater the chances are of being able to save a million dollars.
What Can You Do to Save a Million Dollars?
There are plenty of things you can do to work toward the goal of saving one million dollars and increasing your savings. Learning how to start saving money is important.
Don’t Spend Senselessly
Many people get into the habit of spending their money on services and goods that aren’t needed. Even a relatively small expense, such as a coffee every morning, can add up and increase the amount of money you have to save. Bigger expenses can also prevent you from adding money to savings each month. It’s important to realize it’s not just one habit or item that you need to cut out to get sizable wealth. Usually, in order to save a million dollars, it’s about a disciplined lifestyle and budget.
This means you may have to make some sacrifices, such as using public transportation to get to work, cutting back on unnecessary expenses, or eating out less often. This also doesn’t mean that you shouldn’t be going out and having fun but it should be in moderation. Setting a budget is going to be important if you hope to save money. If you start young then saving a sizable amount of money may only require some minor adjustments to spending habits. The lifestyle creep can be a real hindrance on your journey to save a million dollars. Buying more stuff won’t make you happier.
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Start Funding Retirement Immediately
When you get money, your first priority will be to pay your monthly expenses, such as food, the mortgage, and other life necessities. Once you have taken care of these expenses the next step should be to fund your retirement. Unfortunately, this is an afterthought for many people. If you fund a 401k or an IRA early on, it means you are able to contribute less money and end up with more in the end than someone who put more money in but started later in life.
While you are able to borrow against your 401k if you want to save a million dollars, this option should really only be reserved for emergencies. A kitchen remodel does not constitute an emergency. The money you take out of your 401k isn’t going to be growing, which means that you miss out on gains you would have otherwise if your money was invested in the stock market.
Some plans won’t even let you contribute money until the loan is paid off, which means you will be further behind. If you happen to leave your job before you repay it then you are required to pay off the balance within the next 30 to 60 days. If you aren’t able to pay it back then the loan is treated as a distribution, which means you have to pay taxes on the amount, plus an early withdrawal penalty. This can be a major roadblock in your efforts to save a million dollars.
Improve Your Tax Awareness
You may think doing your own taxes will save you money and you may be right, but you may not be. It could end up costing you money since you could be failing to take advantage of deductions. The more educated you are about what is deductible, the better off you will be.
You also need to understand when it makes sense to itemize the return instead of taking the standard deduction. If you aren’t able to fully understand all the tax information then paying someone to assist can be helpful, especially if you own a business, are self-employed, or have another issue that can complicate your tax return.
Own Your Home
You may rent a home since you can't afford to purchase one or you aren’t sure where you want to live for the long term. However, renting doesn’t give you a good long-term investment since purchasing a home is a way to build equity. Unless you are going to move in a short period of time, it makes sense to buy so you can build up some equity.
Be careful in the size of the home you buy. Yes, real estate is a good investment but buying a bigger house means you spend more on furniture, landscaping, and utilities, and it leaves you with less money to put into savings and investments.
In order to pay down your home faster, make an extra mortgage payment each year. With just one extra payment, you are able to save thousands in interest and there isn’t much of an impact to or hassle on your bottom line. One extra payment per year can reduce the length of the loan, as well as the total interest paid over the life of the loan. Fewer total payments and less interest is more money that you can save and put toward your goal.
You may even want to consider getting into real estate as an investment strategy. If you are a more experienced buyer with enough equity in your home, you can borrow from your current equity to buy an investment property. Be sure to do your homework and understand the strength of the rental market in your area.
Avoid a Luxury Car
While there is technically nothing wrong with owning a luxury car, those who do are at a disadvantage since the vehicle depreciates so quickly.
How fast a car will depreciate will depend on the model, make, and demand for the vehicle, but a general rule of thumb is a new car will lose 15% to 20% of its value in a year.
When you are younger, consider buying something more practical and dependable that you can pay for with cash or has lower monthly payments. This means you have more money to put toward savings instead of an asset that depreciates. Saving money on transportation is a big part of becoming a millionaire.
Don’t Sell Yourself Short
You may be loyal to your employer and stay with them without getting a raise for years. This can be a mistake since increasing your income is a way to boost your savings. Always be on the lookout for ways to not sell yourself short and other job opportunities. Work hard and do so for an employer that compensates you for your skills, experience, and work ethic.
You want to invest in yourself. While starting a business can make you a millionaire, there are high risks. Many new businesses fail within the first five years. Having a well-thought-out business plan, along with identifying a service or product that is in demand, can help increase your chances of a successful business that will make you money.
Automate Savings
You aren’t able to spend money if you don’t have it in your take-home pay. Take advantage of your employer’s 401k plan and other retirement accounts and put savings on autopilot. You don’t have to do this just for retirement and automate the amount you have to save each month in order to save a million dollars so you aren’t spending that money before you can invest it.
Maximize a Windfall
While the odds of your actually winning the lottery or getting a huge inheritance from a relative you barely know are low, there is still a good chance that you will get a decent windfall at some time in your lifetime. With some planning, you can transform that into your million-dollar nest egg. Sources of windfalls besides an inheritance include insurance payouts, sale of businesses, and stock options. While managing a new windfall is a problem that everyone would like to have, it can be a bit stressful. Friends and family members will have plenty of suggestions on how to invest your money.
You could even be tempted to splurge on big-ticket items that you haven’t been able to buy. The most important tip is to take a step back. Depending on what you inherited, such as an IRA, there could be some rules but the best place to stash a windfall, for the time being, is to put it in a safe place, such as a money market fund or bank account. While you won’t be earning any interest, you will give yourself some time to come up with a long-term plan. You may not want to invest your entire windfall but you can invest a given amount on a regular schedule so you still have money on the sidelines if the market turns upside down.
Use Credit Card Rewards
It’s best to remain debt-free outside the money you owe on your home and you can use rewards credit cards to earn cash back, travel rewards, and more. If you don’t carry a balance on your credit card and pay credit card interest then it’s true money for the taking. You can use credit card rewards to then take a vacation or do something you want to do but can’t otherwise because you are busy saving.
Remember that you should only be putting regular expenses on your credit card and not just spending in order to take advantage of the rewards. If you are already struggling with debt, you should stay far away. It won’t matter how great the reward program is if you are paying a lot in interest, even with just carrying a moderate balance. Having any sort of credit card debt is going to be a roadblock for your plan.
Final Thoughts
Saving a million dollars is possible. The earlier you start, the easier it will be to save a million dollars. Utilize smart strategies with your money, such as taking advantage of retirement savings, being smart about spending, and automating your savings to make it easier to save. Saving a million dollars isn’t easy so you also need to make some lifestyle changes, such as not spending senselessly and being mindful about the car you are driving. With some hard work, you can be on your way to becoming a millionaire.